Does Cambodia’s Coronavirus Bailout Really Add Up?

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Does Cambodia’s Coronavirus Bailout Really Add Up?

The proposed solution deserves scrutiny.

The Cambodian government’s response to the now worsening COVID-19 crisis had initially been woeful. When the epicenter of the virus was China, its close ally, Phnom Penh dithered. Prime Minister Hun Sen was complacent about the threat, even mocking those who raised the alarm.

Now as the number of infection cases spike in Cambodia, forcing the country to close its borders and restrict movement, the government is getting serious. But months of delay and obscuration mean it is a panicked response which deserves much scrutiny, and a case in point is the indications of a potential bailout which raises more questions than answers.

There’s no telling how much worse the health crisis will get, and how high infection numbers will climb. More tangible, though, is the fate of the economy. The Asian Development Bank forecast in early March that if the outbreak lasts another two months it will cost the economy $283 million in GDP, and if another six months, a $711 million loss. But that was before the European and American shutdowns, a major problem considering those are by far Cambodia’s largest export markets. Moody’s, the U.S.-based ratings agency, has reportedly more recently downgraded its forecast for Cambodian growth this year down to 4.5 percent. If true, except for a blip in 2009 because of the global financial crisis, it will be the worst growth rate in decades.

The vital tourism industry was already in disarray because Chinese tourists, a main market, tumbled in January and February. It will now suffer because Europeans aren’t travelling abroad, either. Cambodia’s other main sector, apparel manufacturing, was also dented as supply chains ground to a halt in China. It is now doubly impacted as Western brands are suspending or canceling purchases. If as many as a third of factories are forced to temporarily close for several months, affecting hundreds of thousands of workers, as some projections estimate, it will be deleterious. The real impact may be worse, however.

Then there are numerous other economic woes Cambodia faces, either a result of the COVID-19 pandemic or the government’s ghastly management of the economy in recent times.

The National Bank of Cambodia, the rather competent central bank, did impressively move quickly earlier this month to ease restrictions on borrowing, which means banks and other financial institutions can borrow at lower rates, giving them enough liquidity to accept suspended payments from customers. More capital should also allow banks to lend more freely, which, one hopes, will spur investment and consumption.

Less palpable is the government’s offer of a stimulus package. Hun Sen announced on March 10 that his government has put aside between $800 million to $2 billion to help the economy weather this crisis. The latter figure applies if the global COVID-19 outbreak lasts until the end of the year, Hun Sen said. Granted, it is relatively large. It represents a quarter of the government planned state budget for this year. But, at present, it appears to be a back-of-an-envelope figure, with little indication of just how it will actually be spent.

Some reports suggest that $50 million set aside for low-interest loans for struggling small firms was a measure related to the COVID-19 crisis, but that was actually planned last year and will be facilitated by the new Agricultural and Rural Development Bank. And much of this $2 billion stimulus package isn’t actually expenditure but expected reductions of state revenue because of tax breaks, delayed tax payments and other such measures that Phnom Penh will now offer businesses. A 4 percent stamp duty tax on property purchases has been suspended, for instance, while hotels and guesthouses in certain tourist hotspots have been exempted from paying tax until at least May. Cambodian import garment factories can also enjoy tax holidays until the end of the year. Moreover, many of these measures stemmed not from the COVID-19 crisis, but from Cambodia’s partial removal from a European Union preferential trade scheme last month.

The clearest element to the relief package is state-contributions for garment workers who are made to take enforced leave if factories close because of the COVID-19 outbreak. The government says they will receive 60 percent of minimum wage, which rose to $190 per month this year. A third of that will be paid by employers, and two-thirds by the state. And it is better than current laws which state a worker should only receive 40 percent of wages under similar circumstances. Though affected work can now earn $114 per month, many say is simply not enough to live on for months, especially as they won’t receive overtime pay either.

If more pessimistic projections are close to the truth, and 30 percent of garment workers have to bailed out for six months, it will cost the state $98.4 million. Not so much, but here’s the problem with the government’s planning so far: with a 40 percent pay cut and no overtime, tens of thousands of garment workers won’t be able to send home remittances to their family in the country, many of whom depend on these payments for basic necessities. That will affect hundreds of thousands more people and further depress the rural economy, which is already faltering under yet another year of drought and as the COVID-19 crisis has forced the government to close Cambodia’s borders, affecting trade. Prices of many agricultural products have already tumbled, meaning less money for farmers.

As such, any relief package will have to eventually be extended to other sectors. Like most countries, its airline sector is failing. Cambodia Airports, the company that runs most of the country’s airports, has already called for government support. Cambodia Airlines has cut flights across Asia by 40 percent, and it too may need a bail-out.

The problem for Phnom Penh is once bailouts begin, they’re hard to end. Farmers, too, will need state aid, as will workers in the construction sector. Maybe for now, as the government tried to formulate its exact response, it may be sensible just to focus on the tourism and garment manufacturing sector. But that might not be the case for much longer. A recent statement by the Independent Democracy of Informal Economy Association, an association of small companies, noted: “Based on what our members throughout the country are telling us, their incomes have slowly declined since the outbreak of COVID-19. We estimate a decline of around 70 percent.”